The Woodbois Ltd (LSE:WBI) share price has been on quite the rollercoaster ride this year. The stock kicked off 2022 at a price of 4.4p. But following the release of encouraging results, shares erupted to 8p, hitting a 52-week high as investor excitement surrounding this business picked up.

Today the momentum has slowed down slightly, and Woodbois stock now trades around 5.2p, placing its market capitalisation at £108.6m. But that’s still around 18% higher than the start of the year and 25% higher over the last 12 months. What’s behind all this volatility? What does Woodbois actually do? And what do analyst forecasts predict will happen next?

What does Woodbois Ltd do?

Woodbois is engaged in producing, processing, manufacturing, and supplying sustainable softwood, hardwood, and related products. The company is the source of supply for African timber around the world, on a mission to fulfil the demands of the global lumber industry.

Woodbois shares are listed on the London Stock Exchange. The business itself is incorporated in Guernsey, the Channel Islands, and has its headquarters in London, United Kingdom. That makes it a UK business. However, it’s worth noting that operations primarily take place in Central Africa. And despite the Woodbois share price being reported in pence, the financial statements are reported in US dollars.

Initially, the group operated under the name Obtala before rebranding itself in March 2019 to Woodbois. Today, it has more than 350 employees working under the key executive directors Paul Dolan (owns 3.63% of shares) as Chief Executive Officer and Hadi Ghossein (owns 1.01% of shares) as Executive Deputy Chairman.

What is the key financial information for Woodbois?

The firm demonstrated a year of solid, commendable progress in 2021. Even more so when considering the Covid-dominated macro-economic backdrop, the stock market has suffered through over the last two years. So, I’m not surprised to see the stock price take off.

Looking at the latest annual report, the timber producer reported a 14% leap in revenue driven by increased sawmill and veneer production. But what seems to have grabbed investors’ attention is its earnings. Gross profits jumped from $1.2m to $3.5m year-on-year thanks to a drastic expansion of gross profit margins. That’s a 186% surge courtesy of gross margins climbing from 8% to 20% in a relatively short space of time.

As of the end of March this year, the group has around $2.7m in cash on its balance sheet. This provides a nice lump of liquidity that management can leverage to drive future growth and maintain positive cash flow.

In my experience, that’s generally great news for prospective income investors looking for a sustainable source of dividends. For the time being, Woodbois shares do not pay any dividends. But can Woodbois build on its timber business to potentially change that? Yes. Or at least, I think it can.

The company recently acquired 71,000 hectares of additional high-quality virgin forestry in Gabon, Africa. Needless to say, that’s a pretty massive area of land to grow and supply the world with timber.

While it will undoubtedly take some time to unlock the full value of this acquisition, I can’t deny the future performance and growth potential looks encouraging. Perhaps that’s why the Woodbois share price forecasts from analysts are expecting double-digit growth trends for 2022. Currently, broker recommendations are set to buy with a price target of 6.75p.

Diving into the details driving the Woodbois share price

An increase in the forestry capacity is a great move forward for both the African-focused timber company and the environment in general. After all, with ESG investing becoming increasingly popular, a business focused on making forestry sustainable seems like an excellent fit. And once the shipping and freight sectors begin to normalise once again, net profit margins could be set to expand further.

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Yet, despite the positive outlook for the Woodbois share price, I’m not entirely convinced. Right now, the firm is operating on the brink with its cash flows and profitability levels. So how much money does Woodbois make?

In its 2021 annual report, profit before tax landed at a whopping $90.7m! But upon closer inspection, $88.3m of that came from Gain on Bargain Purchase. This is the 71,000 hectares I talked about earlier, which the firm was able to buy at a significant discount from its book value.

The seller was likely facing a liquidity crunch hence the massive discount. However, the $88.3m profit is not actual cash since the value is locked up in the forestry assets. In other words, it’s a non-cash gain. Meaning it’s worthless if Woodbois can’t unlock the value in its purchase. And that most likely explains why Woodbois’s PE ratio is only around 1.68 despite its rapid growth.

Should I invest in Woodbois at today’s share price?

At this stage, the company’s situation is quite tricky to judge, and the high risk nature of the stock means that tables can turn at any point. Demand for timber is on the rise. And the group’s venture into carbon credits may yield lots of fruit. But Woodbois has larger key competitors like Anglo-Eastern Plantations still to fend off.

Around 50% of the shares outstanding are owned by financial institutions, indicating it has some financial backing from investment funds. But is Woodbois a good buy for my portfolio? I’m not convinced. At least, not at this stage. Therefore, I’ll keep an eye on Woodbois’ performance and share price for now and see whether it can tap into the value of its newly acquired land before adding any shares to my portfolio.

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.